Local currency rates and FX screen very cheap, while hard currency credit is rich.
Hard currency debt valuations:
Credit Spreads: Rich
- The current excess spread of 93 bps is in our first quintile of attractiveness
- Historically, an excess spread in this quintile has been associated with a subsequent mean 2 year annualized credit return of -2.1% (above the risk-free rate)
- This implies a valuations-based negative assessment
USD Rates: Neutral
- Our “deviation from fair value” for USD interest rates shows a modest deterioration in the attractiveness of USD duration, with current levels slightly below fair value
Local currency debt valuations:
FX: Very Attractive
- At 2.2%, our expected spot return indicator lands in the most attractive fourth quartile
- Mean subsequent GBI-EMGD weighted spot return has been +8.7% for the fourth quartile and +7.1% for the third quartile
Local Rates: Very Attractive
- EM local rates maintained an attractive valuation gap versus U.S. interest rates
- At 0.7%, this is in our most attractive fourth quartile, where the mean subsequent EM/U.S. return differential has been +2.6%